The air is thick with information and counter-information about inflation. There’s trench warfare happening. No sooner does the government come out with yet another artillery barrage of actions than the Central Statistical Organisation says oops, and revises past inflation numbers upwards. To a spectator, it would be amusing if it were not so worrying, the sheer helplessness on display. And of course, the media and newspaper columnists (including me) love it all as it adds grist to their mill. In fact, one such column in a business paper argued last week that food price inflation was far worse in the Communist Party of India (Marxist) states than the Bharatiya Janata Party-ruled ones.
To begin with, some of the government’s reactions seem extremely short-sighted—such as the ban on commodity futures. The Abhijit Sen committee clearly said there was little evidence of any connection between trading in futures and inflation. The finance minister had set up the panel and in his 2007 Budget speech, had said he would abide by its recommendations. Evidently, the abundant supply of potatoes was known from the futures market several months before the crop hit the market; also that wheat prices had held in the futures, in the face of global rises. We now know the groundnut crop will be good three months down the line, that the mustard crop will be average, and so on. The futures market in agricultural commodities had emerged as a transparent, independent price discovery and supply availability mechanism—it’s been killed. With the threat of government action, steel producers reduced their prices, but their call to sort out issues of raw material prices and supply of iron ore has been ignored. The government warns of “administrative measures”, fully knowing these had earlier led to black marketing and hoarding with little benefit to either the consumer or the supplier.
External economic and market analysts, too, are increasingly commenting about the inept handling of the situation. I wrote weeks ago that current account inflows would start drying up —this is now happening. And, coupled with the hike in oil prices, the rupee is sliding against the sliding dollar, quite a feat in itself. These analysts are also concerned that this state of inertia may continue for some time, and that India, instead of being “the economy”, will be just one among many.
It is time to put things on track, so that the gains of the last few years are not lost. The good news is that food price inflation will be down, given the excellent wheat crop and adequate supply of rice. It is thus important that the next few months be spent in cleaning up the public distribution system (PDS) in the states. It is worth noting that the Left, which is so vocal about inflation, doesn’t look at the poor delivery of PDS in the states it rules. The one big opportunity afforded by the inflation problem is that of making effective the delivery of subsidized grains to the below-poverty-line group. In an election year, this would surely be popular. I have written earlier of several ways this can be done —now, with adequate food stocks, there is a chance to get it right.
This is also the time to address the manufacturing sector’s problems. Across industries, input costs are rising, either due to a rise in international prices, or due to a lack of capacity. Consider the chemicals industry. Process chemicals, required for a multitude of industries, from tyres to footwear to garments, are in short supply due to global demand. There are supply constraints in plastics and metals. Rather than Indian firms setting up capacities abroad, they can source these inputs at home, provided we ease the plethora of policy constraints on small and medium enterprises—which can then take the opportunity to create world class capacities. The problem is that only a small group of high-end firms are commanding the attention of both policymakers and the media.
Finally, this is an opportunity to get mining policies right. India is very rich in mineral wealth, a whole range from precious stones to base metals and their ores, but we have exploited very little of it. If we were just to concentrate on the steel, cement and aluminium industry, we can make India a major manufacturing hub. We need to learn from the 1980s, when the manufacturing sector sourced the latest technologies from the world: It is time to update technologies again.
Even for a coalition government, these are doable—this year. It is quite evident that next year, the government will have to find the means to pay plenty of unpaid bills for oil, fertilizers and food: Having taken that risk, it is important to get the basics right for a strong economic recovery once global fears subside. The worry is that the government seems to believe too much in the Gita, which says “leave all your actions and believe in me, and I will take care of the consequences of all your past actions”—we may, therefore, see no action at all.
S. Narayan is a former finance secretary and economic adviser to the prime minister. We welcome your comments at email@example.com